Debt is often preferable to equity financing since it enables funding without sacrificing ownership. As Peoples Bank Chief Commercial Banking Officer Jody Street advises, debt is most effective when paired with thoughtful planning and clear alignment with your business’s objectives.
“Great businesses are built with not just ideas, but careful planning and disciplined execution.”
When structured responsibly, debt helps businesses expand without undue risk. However, excessive or poorly-timed borrowing can turn a helpful tool into a financial burden.
Borrowing excessively carries significant risks. Strained cash flow makes it difficult to meet obligations like payroll, while damaged creditworthiness increases the cost of future financing. A major risk lies in overly optimistic revenue projections. Missing targets could result in insolvency or investment loss. A conservative, deliberate approach to borrowing can help businesses avoid such pitfalls.
“Debt, when used strategically, can be a catalyst for growth, but it requires a clear understanding of your financial capacity,” Jody Street explains.
Before borrowing, assess your financial health using metrics like the debt-to-equity ratio. Aim for ratios under 2.0, signaling reliance on equity alongside borrowing. Confident financial evaluations set businesses up for success.
Avoid overestimating revenue growth. For safe repayment planning, maintain a debt service coverage ratio (DSCR) of 1.50 to 1.75. Setting aside a financial cushion ensures obligations are manageable, even during setbacks.
A healthy leverage ratio compares liabilities to equity and guards against negative equity, where liabilities exceed assets. Monitoring industry benchmarks helps ensure financial stability.
Effective debt management lowers long-term costs and improves cash flow by focusing on:
When approached with discipline, debt becomes a tool for business growth without sacrificing control. By employing conservative strategies and monitoring key metrics, entrepreneurs can manage debt wisely and unlock their companies’ potential for sustainable success.
To learn more about how Peoples Bank can support your business goals, contact our business team to explore strategies for optimizing your cash flow and securing your business’s financial health.
